Using the yield spread to forecast recessions and recoveries
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The yield spread increased in May 2013. This follows a varying trend up from July 2012, its lowest point in five years since the 2008 recession. The yield spread will increase consistently in a couple of years, creating a more prudent volatility in the real estate market as today’s zero lower-bound mortgage and capitalization rates become history.
Today’s relatively low yield spread suggests the economy will remain lackluster well into 2014. The good news: consumer inflation will remain low for at least a year. The bad news: low yields on risk-free investments (like bonds) have, via syndicators, driven cash-heavy speculators almost solely to hard assets (goldbug-fetish having faded for want of the next paranoia). This has caused temporary overpricing (disproportionate to the low rate of inflation) in the real estate market.
Looking forward, home prices will slip back to their mean-price level as awareness of the inevitable downward pressure brought on by rising interest rates becomes common. Remember, a sustainable rise in home prices will only boot up after 12 months of consistently increasing home sales volume, a rise damped down by the coming higher interest rates.
The ongoing low yield spread is the result of the Federal Reserve’s refusal to abandon zero-bound rates and go negative and the bond market’s gloomy outlook.
Want to see jobs and real estate sales volume heat up? Allow bankers to borrow lower (at negative rates) and lend at today’s mortgage market rates - more profit to cover taking on riskier mortgages. Lender margins between the cost of funds and today’s short-term rates are too skimpy to achieve the level of excitement required to jump start the mortgage market or property sales volume.
[See current market rates]
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About The Author
ft Editorial Staff
is the writing staff comprised of legal editor Fred Crane, In-House Broker Consultant Fernando Nunez and writer-editors Connor P. Wallmark, Giang Hoang-Burdette, Jeffery Marino, Carrie B. Reyes, Sarah Cantino, Matthew Taylor, Matthew Shade and Nicole Jessen.
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Great article on “Using Yield spread to forecast……….Unfortunately the links to previous articles, i.e.”Rate Page”, etc. would not open, I got an error message. If possible I would like to be able to read these references.
I am interested in following this index, how do I find daily quotes, on line, for both the 10 year and the 3 month?
Do I just need the Ticker Symbol? If so I would appreciate the Ticker Symbols for both the 10 year and the 3 month.
Thanks,
Gary Hancock
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As a long time real estate broker, since 1974, I can say recessions are easily forecast by on the street personal experiences. This last one was so obvious.. we had three years or more of the lax oversight, the liar loans and influx of new agents poorly trained and not supervised.
Any real estate broker who missed this should be working for the SEC. In the 80′s we had similar loans where we often said “if they can fog up a mirror, we can get them a loan”
Yields can also create the situation where the loan broker ignores his client while making more money. It was and is fraud. I quit as I no longer could stomach the stench from so many greedy agents and brokers who just chase the buck and heck* with the professionalism.
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Tom is exactly on point. The current market was so obvious, it was all about greed.
Geo. J. Donaldson Jr.
Real Estate Broker
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While Tom and Geo are right about being able to predict a downturn, if your in the business or you listen carefully to people who know the business well, most other people are either too swept up in the greed or don’t they pay attention to what’s going on around them.
Anyway, the chart certainly seems to “presage” what happened. However, the chart shows a back to back recessions of 1980-82. being worse that the current recession, which everybody has been calling the Great Recession. Is there something wrong or is it just the measure you choose?
For example, I’ve read that during the Great Depression (David Kennedy’s book “American in the Great Depression) unemployment was between 15-25% for most of the 10 years. During the 1973 period, during the oil embargo, it rose above 10%. How quickley we forget the past..
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If predicting and investing was only so easy as a chart!! Anyway, there is something interesting in the graph. It’s heteroscedastic, with something happening in the boundary period of 1980-1982, perhaps the decoupling of the oil standard, I dunno, but post-82 it looks like a different world. Don’t look at the wiggly lines, look at the number and frequency of the intersections with the upper and lower control limits. I’d be interested in why more orange line interections pre-82. Looks like fewer intersections with the green line after 82 as well, greater variance (well, after 70 anyway), and higher median spread. It would be nice to see data further back.
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It pays to shop around for a mortgage refinance. Mortgage rates have gone down like anything. My brother in law just got a 30-year fixed loan at 3.76% He told me search online for “123 Mortgage Refinance” for the lowest rate.
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These are not recessions since 1998 they are bank made financial crises
http://www.pbs.org/wgbh/pages/frontline/warning/interviews/born.html#2
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Where can i find this bond rate data since 1954?
Thanks,
Ben
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Dear Ben,
You can find the bond rate data at the Federal Reserve Bank of St. Louis’ website. The 10-year Treasury data is found here , and the 3-month Treasury Bill can be viewed here.
Regards,
ft Editorial Staff
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I am new to this arena, so I had to look up the term Yield Spread. For anyone that is interested, I found a good definition here https://realestatemetro.com/real-estate-terms/yield-spread
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